Why more millennials with student debt are qualifying for mortgages
A recent push by Fannie Mae to enable more millennials who are burdened by student debt to buy homes appears to be having its intended effect. Bankers said that they are finding it easier to qualify young homebuyers as a result of the policy changes.
Fannie announced the new rules back in April. Perhaps the most consequential change was a revision to the formula that banks use to calculate a borrower’s debt-to-income ratio, which is a gauge of the person’s ability to make monthly payments.
Under the previous guidance, a lender would consider the higher of either a borrower’s amortizing student loan payment, or 1% of their student loan. A borrower whose monthly payment was reduced from $500 to $100 on an income-based repayment plan might be rejected under those rules because the lender had to use a more conservative measure than the actual monthly payment.
Under the revised rules, the lender can use the borrower’s actual monthly student loan payment for the purpose of calculating the debt-to-income ratio.
Fannie also expanded a cash-out refinance option, which may enable some existing homeowners to pay off their student loans. In addition, the government-sponsored enterprise allowed mortgage lenders to take into account the fact that borrowers’ parents sometimes cover certain nonmortgage debt payments.
Bankers say the changes have made a difference, although it’s early yet to quantify just how much.
“We don’t specifically measure how many borrowers we have that have student loan debt,” said Michael Sheahan, the retail lending manager at the $1 billion-asset Chelsea Groton Bank in Connecticut. “But when I sit with our underwriting team, and we talk about whether the program’s made an impact, it’s definitely made an impact.”
Sheahan recounted the story of a borrower the bank was ready to decline on the day Fannie announced the changes. Under the old rules, the borrower’s debt-to-income ratio was a bit too high. But calculated under the new rules, the ratio dropped to an acceptable level.
The changes were Fannie Mae’s answer to a problem that has vexed mortgage lenders in recent years: Young people aren’t buying homes at the same pace that previous generations did, and student debt is a major obstacle. Fannie aimed to give lenders more flexibility in how they evaluate student debt.
“There’s a large bucket of millennials that are burdened with student debt, and this relaxed guideline really makes sense,” said Bob Cabrera, the national consumer lending sales manager at Regions Financial in Birmingham, Ala. “If in fact you’re not paying 1% of your outstanding debt and it’s not part of your monthly responsibility, why include it in the [debt-to-income ratio]?”
Steve Shoemaker, director of residential mortgage production at Synovus Mortgage, said that Fannie’s changes have brought attention to the demand for mortgages among student debt-addled millennials. He said that Fannie Mae is “reacting much more quickly than I think we would have seen in the past in trying to meet the needs of our consumers, so that everyone has this opportunity.”
Of course, challenges remain. For many young adults in major metropolitan areas, high home prices and a shortage of available inventory are particular concerns. More borrowers may now be able to qualify for a mortgage, or qualify for a bigger mortgage than they would have previously, but finding a home to buy is another story altogether.
That’s one of the main challenges for borrowers who show up to the $2.4 billion-asset Belmont Savings Bank in Massachusetts, said CEO Bob Mahoney. Count him among those who harbor some suspicion about Fannie Mae’s changes.
Specifically, Mahoney has concerns about Fannie Mae’s tweak to the debt-to-income ratio. The change may result in more applicants qualifying for mortgage loans, but it does not reduce their overall debt burden.
“When parents are paying the debt, I buy that one. Fine, take that off the list,” Mahoney said. “But sometimes we get into trouble by lending too much money to good people. There’s the other side of the coin.”